B.

Nimalathasan, A comparative study of financial performance of banking sector in Bangladesh – An application of

CAMELS rating / Annals of University of Bucharest, Economic and Administrative Series, Nr. 2 (2008) 141-152

A COMPARATIVE STUDY OF FINANCIAL PERFORMANCE OF

BANKING SECTOR IN BANGLADESH – AN APPLICATION
OF CAMELS RATING SYSTEM

B. NIMALATHASAN∗

The Banking sector in Bangladesh is different from the banking as seen in other
developed countries. This is one of the Major Service sectors in Bangladesh economy, which
divided into four categories of scheduled Banks. These are Nationalized Commercial Banks
(NCBs), Government Owned Development Financial Institutions (DFIs), Private Commercial
Banks (PCBs), and Foreign Commercial Banks (FCBs). Performance of financial Institution is
generally measured by applying quantitative techniques of financial measurement. It is a post –
mortem examination techniques of achievement of a bank. Many Studies are conducted in
different countries to judge the performance of their banking system. Using different statistical
methods such as Data Envelopment Analysis (DEA) and the Stochastic Frontier Approach (SFA).
The present Study is initiated a Comparative Study of Financial Performance of Banking Sector
in Bangladesh using CAMELS rating system with 6562 Branches of 48 Banks in Bangladesh
from Financial year 1999-2006. CAMELS rating system basically quantitative technique, is
widely used for measuring performance of banks in Bangladesh. Accordingly CAMELS rating
system shows that 3 banks was 01 or Strong, 31 banks were rated 02 or satisfactory, rating of 07
banks was 03 or Fair, 5 banks were rated 4 or Marginal and 2 banks got 05 or unsatisfactorily
rating. 1 NCB had unsatisfactorily rating and other 3 NCBs had marginal rating.
Keywords: Financial Performance, Banking, CAMELS, and Rating System.

Background of the Study

Bank is very old institution that is contributing toward the development

of any economy and its treated as an important service industry in modern
world. Nowdays the function of bank is not limited to with in the same
geographical limit of any country. It is an important source of financing for
most businesses. The common assumption, which underpins much of the
financial performance research and discussions, is that increasing financial
performance will lead to improved functions and activities of the organisations.

∗
B. NIMALATHASAN, Lecturer, Department of Commerce, Faculty of Management
Studies & Commerce, University of Jaffna, SriLanka, & Ph. D. Research Scholar, Department of
Management Studies, Faculty of Business Administration, University of Chittagong, Bangladesh.
 B. Nimalathasan, A comparative study of financial performance of banking sector in Bangladesh – An
application of CAMELS rating / Annals of University of Bucharest, Economic and Administrative Series, Nr. 2 (2008)
141-152

The concept of financial performance and research into its measurement

is well advanced within finance and management fields. Recently a well-judged
technique named CAMELS rating is widely used for evaluating performance of
financial institutions, especially to banks. In Bangladesh Bangladesh bank as a
Central bank, which is regulatory body has been calculating this rating till now.
Performance of the banking sector under CAMELS frame work, which involves
analysis and evaluation of the six crucial dimensions of banking opeartions.
Thus CAMELS consists of a set of performance measures that give a
comprehensive view of the banks based on the following rates.

Capital Adequacy

Focuses on the total position of bank capital and protects the depositors
fro the potential shocks of losses that a bank incur.

Asset Quality

The composition of all commercial banks shows the concentration of

loans and advances in total assets. The high concentration of loans and advances
indicates vulnerability of assets to credit risk, especially since the portion of
non-performing assets is significant

Management Soundness

Sound management is the most important pre-requisite for the strength

and growth of any financial instituton. Since indicators of Management quality
are primarily specific to individual institution.

Earnings and Profitability

Strong earnings and profitability profile of a bank reflect its ability to

support present and future operations. More specifically, this determines the
capacity to absorb losses by building an adequate capital base, finance its
expansion and pay adequate dividends to its shareholders.

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application of CAMELS rating / Annals of University of Bucharest, Economic and Administrative Series, Nr. 2 (2008)
141-152

Liquidity

Liquidity indicators measured as percentage of demand and time

liabilities (excluding inter bank items) of the banks.

Sensitivity to Market risk

To assess the degree to which a bank might be exposed to adverse

financial market conditions, the Bangladesh Bank added a new Characteristic
named as “Sensitivity to Market risk” to what was previsiouly referred to as the
CAMEL rating. In particular, Bangladesh Bank (BB) to interest rate movement
through the introducing of revised CAMELS rating system since 1 July 2006.
Based on this background the present study is initiated on a Comparative
Study of Financial Performance of Banking Sector in Bangladesh with 6562
branches of 48 banks in Bangladesh.

The Literature Review

Generally, the financial performance of banks and other financial

institutions has been measured using a combination of financial ratios analysis,
benchmarking, measuring performance against budget or a mix of these
methodologies (Avkiran, 1995). Simply stated much of the current bank
performance literature describes the objective of financial organizations as that
of earning acceptable returns and minimizing the risks taken to earn this return
(Hempel et al., 1996). Chien and Danw (2004) showed in their study that most
previous studies concerning company performance evaluation focus merely on
operational efficiency and operational effectiveness, which might directly
influence the survival of a company. By using an innovative two-stage data
envelopment analysis model in their study, the empirical result of this study is
that a company with better efficiency dose not always means that it has better
effectiveness. Elizabeth and Ellot (2004) indicated that all financial
performance measure as interest margin, return on assets, and capital adequacy
are positively correlated with customer service quality. Scores Mazher (2003)
discussed the development and performance of domestic and foreign banks in
Arab gulf countries, and showed that local and foreign banks in these countries

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 B. Nimalathasan, A comparative study of financial performance of banking sector in Bangladesh – An
application of CAMELS rating / Annals of University of Bucharest, Economic and Administrative Series, Nr. 2 (2008)
141-152

have performed well over the past several yeras. Moreover, he added that banks
in these economies are well capitalized and the banking sector is well developed
with intense competition among the banks. Generally, the concept of efficiency
can be regarded as the relationship between outputs of a system and the
corresponding inputs used in their production. Within the financial efficiency
literature, efficiency is treated as a relative measure, which reflects the
deviations from maximum attainable output for a given level of input (English
and Warng, 1992). However, there have been numerous studies analyzed the
efficiency of financial intuitions. Among these, (Rangan and Grabowski, 1988)
use data envelopment analysis to analyze technical efficiency in US banking
into pure technical and scale efficiency.
Based on the above literature, we can say that there are some studies
about banks in various countries, however a detailed study has not yet been
conducted in Bangladesh context, especially Banking sectors. Hence the present
study is made on Comparative Study of Financial Performance of Banking
Sector in Bangladesh: an application of CAMELS rating system with 6562
branches of 48 banks in Bangladesh.

Data Collection

Secondary data were used for the present study. The annual data for all banks
during the financial years of 1999-2006 are used for rating the performance of the
banks. In addition another source of data was through references to the library
and the review of different articles, papers, and relevant previous studies.

Objective of the Study

The ultimate objective of the paper is to highlight comparison of financial

performance of banks.

Sampling Design

The sample for this studies all branches of the banks in Bangladesh. The
Banking sector in Bangladesh is different from the banking sector as seen in
developed countries. This is one of the major service sectors in Bangladesh economy and
can be divided mainly into four categories Nationalized Commercial Banks (NCBs),

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 B. Nimalathasan, A comparative study of financial performance of banking sector in Bangladesh – An
application of CAMELS rating / Annals of University of Bucharest, Economic and Administrative Series, Nr. 2 (2008)
141-152

Government Owned development finance Institutions (DFIs), Private Commercial

Banks (PCBs), and Foreign Commercials Banks (FCBs). At present there is 48
Scheduled banks operating in Bangladesh of these 4 are nationalized, 5 are
development finance institutions, 30 are local private commercial and 9 are foreign
commercial banks. All branches of the banks are taken for the present study.

Results and Discussions

Normally, Banks in Bangladesh have to maintain a minimum Capital

Adequacy Ratio (CAR) of not less than 9.0 percent of their risk-weighted assets
(with at least 4.5 percent in core capital) Taka 1.00 billion, whichever is higher.

Table 1
Capital to risk weighted assets ratio by types of banks
(Percent)

Types
1999

2000

2001

2002

2003

2004

2005

of 2006
Bank

NCBs 5.3 4.4 4.3 4.1 4.3 4.1 – 0.4 1.1

DFIs 5.8 3.2 3.9 6.9 7.7 9.1 9.2 9.5
PCBs 11.0 10.9 9.9 9.7 10.5 10.3 9.1 9.8
FCBs 15.8 18.4 16.8 21.4 22.9 24.2 26.0 22.7
Total 7.4 6.7 6.7 7.5 8.4 8.7 7.3 8.3

Table 1 shows that as the year of 2006 the DFIs, PCBs and FCBs
maintained CAR of 9.5, 9.8 and 22.7 percent respectively. The 4 NCBs couldn’t
attain the required level due to shortage in owner’s equity, provision shortfall
and overburdened expenditure incurred from operation time to time. One of the
DFIs and 2 PCBsm listed as problem Bank couldn’t maintain required CAR.
FCBs maintained 22.7 percent CAR in 2006. The CAR of the banking industry
was 8.3 percent in 2006 as against 7.3 percent in 2005.
The asset composition of all commercial banks shows the concentration
of loans and advances in total assets. The high concentration of loans and
advances indicates vulnerability of assets to credit risk, especially since the
portion of non-performing assets in significant. A huge infected loan portfolio
has been the major predicament of banks particularly of the state-owned banks.

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 B. Nimalathasan, A comparative study of financial performance of banking sector in Bangladesh – An
application of CAMELS rating / Annals of University of Bucharest, Economic and Administrative Series, Nr. 2 (2008)
141-152

In the total assets the share of loans and advances is followed by the
investment in government securities and bills covering 10.5 percent.
Table 2
NPL ratios by type of banks
(Percent)

Types
1999

2000

2001

2002

2003

2004

2005

2006
of
Bank

NCBs 45.6 38.6 37.0 33.7 29.0 25.3 21.4 22.9

DFIs 65.0 62.6 61.8 56.1 47.4 42.9 34.9 33.7
PCBs 27.1 22.0 17.0 16.4 12.4 8.5 5.6 5.5
FCBs 3.8 3.4 3.3 2.6 2.7 1.5 1.3 0.8
Total 41.1 34.9 31.5 28.0 22.1 17.6 13.6 13.2

Above Table 2 shows that the most important indicator intended to identify
problems with assets quality in the loan portfolio is the percentage of gross and net
non-performing loans (NPLs) to total advances. FCBs have the lowest and DFIs
have the highest ratio of NPLs. NCBs have gross NPLs to total loans of 22.9 percent
whereas in case of PCBs, FCBs and DFIs, the ratios are 5.5 percent, 0.8 percent
and 33.7 percent respectively. Similarly NPLs net of provisions and interest
suspense to the total loans is 14.5 percent, 1.8 percent and 23.6 percent for
NCBs, PCBs and DFIs. FCBs are having excess provision for loan losses.
Sound management is the most important pre-requisite for the strength
and growth of any financial institution. Since indicators of management quality
are primarily specific to individual institution, these cannot be easily aggregated
across the sector. In addition, it is difficult to draw any conclusion regarding
management soundness on the basis of monetary indicators, as characteristics of
a good management are rather qualitative in nature. Nevertheless, the total
expenditure to total income, operating expenses to total expenses, earnings and
operating expenses per employee, and interest arte spread are generally used to
gauge management soundness. In particular, a high and increasing expenditure to
income ratio indicates the operating inefficiency that could be due to flaws in management.
Table 3 shows that expenditure – income (EI) ratio of the DFIs was very
high with 145.2 percent in 1999 and 175.3 percent in the year 2000. This was
mainly because the DFIs made loan loss provisions by debiting “loss” in their
books. The position however improved after 2000 and the ratio came down to

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 B. Nimalathasan, A comparative study of financial performance of banking sector in Bangladesh – An
application of CAMELS rating / Annals of University of Bucharest, Economic and Administrative Series, Nr. 2 (2008)
141-152

89.1 percent and 95.9 percent in 2001 and 2002 respectively but again
rose to 101.1 percent in 2003 and later on 103.5 in 2006. The EI ratio of the
NCBs exceed 100.0 percent in 1999 before falling to below 99.0 percent by end
2003 but again rose to 100.0 percent in 2006 considering provision shortfall. Very
high EI ratio of NCBs was mainly arrtibutable to high administrative and overhead
expenses; suspension of income against NPLs. EI ratio of PCBs is substantially
high due to deduction of provision for loans, other assets and corporate tax from
current income.
Strong earnings and profitability profile of a bank reflect its ability to
support present and future operations. More specifically, this determines the
capacity to absorb losses by building an adequate dividend to its shareholders.
Although there are various measures of earning and profitability, the best and
widely used indicator is return on assets (ROA), which is supplemented by
return on equity (ROE) and the net interest margin (NIM).

Table 3
Expenditure – Income ratio by type of banks
(Percent)

Types
1999

2000

2001

2002

2003

2004

2005

2006
of
Bank

NCBs 100.5 99.4 99.0 98.5 98.8 102.3 101.9 100.0

DFIs 145.2 175.3 89.1 95.9 101.1 104.0 103.9 103.5
PCBs 90.4 90.8 88.1 91.9 93.1 87.1 89.3 90.2
FCBs 67.4 77.7 75.7 78.3 80.3 76.3 70.8 71.1
Total 96.6 99.9 91.2 93.3 93.9 90.9 92.1 91.4

Table 4 shows that ROA and ROE by type of banks and the aggregate
position of these two indicators for all banks. Analysis of these indicators
reveals that the ROA of the NCBs have been almost zero percent considering
huge provision shortfall and that of the DFIs even worse. PCBs had an
inconsistent trend but satisfactory and FCBs’ return on assets ratio consistently
declined from 3.5 percent in 1999 to 2.2 percent in 2006. Furthermore NCBs
return on equity ratio rose from –1.1 percent in 1999 to 3.0 percent in 2003 but
considered as Zero percent in 2006. In case of DFI, the ROE sharply rose from –68.0

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 B. Nimalathasan, A comparative study of financial performance of banking sector in Bangladesh – An
application of CAMELS rating / Annals of University of Bucharest, Economic and Administrative Series, Nr. 2 (2008)
141-152

percent in 2000 to 12.3 percent in 2001 and again declined to –0.6

percent in 2003 and remained worse (–2.0 percent) in 2006. The sharp rise in
2001 was due to booking of net profit amounting to Taka 1.0 billion in 2001
against net loss of Taka 5.2 billion in 2000 by the DFIs. The huge loss of the
DFIs in 2000 was mainly due to making of provisions by debiting “loss” in their
books of accounts.

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B. Nimalathasan, A comparative study of financial performance of banking sector in Bangladesh – An application of CAMELS rating / Annals of University of Bucharest, Economic and
Administrative Series, Nr. 2 (2008) 141-152

Table 4
Profitability ratios by type of banks
(Percent)

Return on Assets (ROA) Return on Equity (ROE)

Bank
1999

2000

2001

2002

2003

2004

2005

2006

1999

2000

2001

2002

2003

2004

2005

2006
types

NCBs 0.0 0.1 0.1 0.1 0.1 – 0.1 0.1 0.0 – 1.1 1.7 2.4 4.2 3.0 – 5.3 – 6.9 0.0
DFIs – 1.6 – 3.7 0.7 0.3 0.0 – 0.2 – 0.1 – 0.2 – 29.4 – 68.0 12.3 5.8 – 0.6 – 2.1 – 2.0 – 2.0
PCBs 0.8 0.8 1.1 0.8 0.7 1.2 1.1 1.1 15.3 17.0 20.9 13.6 11.4 19.5 18.1 15.2
FCBs 3.5 2.7 2.8 2.4 2.6 3.2 3.1 2.2 41.8 27.3 32.4 21.5 20.4 22.5 18.4 21.5
Total 0.2 0.0 0.7 0.5 0.5 0.7 0.6 0.8 5.2 0.3 15.9 11.6 9.8 13.0 12.4 14.1
 B. Nimalathasan, A comparative study of financial performance of banking sector in Bangladesh – An
application of CAMELS rating / Annals of University of Bucharest, Economic and Administrative Series, Nr. 2 (2008)
141-152

Table 5
Net Interest Income by type of banks (NII)
(Billion Taka)

Types
1999

2000

2001

2002

2003

2004

2005

2006
of
Bank

NCBs 3.1 – 1.2 – 1.8 – 1.5 – 0.3 – 1.1 7.7 9.0

DFIs – 0.1 1.0 2.7 1.4 1.3 1.8 1.0 1.7
PCBs 3.0 6.1 9.2 10.2 12.0 13.7 21.0 25.4
FCBs 1.8 2.5 3.3 3.4 3.6 4.2 5.6 8.2
Total 7.8 8.4 13.4 13.5 16.6 18.3 35.3 44.3

From Table 5 we can see aggregate net interest income (NII) of the
Industry has been positive and consistently increased from Taka 7.8 billion in
1999 to Taka 35.3 billion in 2005. However, the NII of the NCBs sharply
declined from Taka 3.1 billion in 1999 to a negative amount of Taka 1.2 billion
in 2000. The trend continued and the NCBs’ interest income in 2001 was less
by Taka 1.8 billion than interest expenses, and in 2002 by Taka 1.5 billion, in
2003 by 0.3 billion and in 2004 by 1.1 billion but in 2005 their positive NII was
Taka 7.7 billion. The DFIs had a negative NII in 1999, which was reversed in
2000 to Taka 1.0 billion and thereafter was positive in 2001 (Taka 2.7 billion),
2002 (Taka 1.4 billion), 2003 (Taka 1.3 billion), 2004 (Taka 1.8 billion), 2005
(1.0 billion) and 2006 (Taka 1.7 billion). In 2006, NCBs were able to increase
their net interest income (NII) by reducing their cost of fund. The NII of the
PCBs and FCBs has been very high over the period from 1999 through
2006.Overall industry NII shows a consistently upward trend. The trend of NII
indicates that the PCBs and the FCBs are charging interests at very high rates
on their lending as compared to the interest they are paying to the depositors.
Commercial banks deposits are at present subject to a statutory liquidity
requirement (SLR) of 18 percent inclusive of average 5 percent (at least 4
percent in any day) cash reserve requirement (CRR) on bi-weekly basis. The
CRR is to be kept with the Bangladesh Bank and the remainder as qualifying
secure assets under the SLR, either in cash or in government securities. SLR for
the banks operating under the Islamic Shariah is 10 percent and the specialized
banks are exempt from maintaing the SLR. Liqudity indicators measured as
percentage of demand and time liabilities (excluding inter-bank items) of the
banks indicate that all the bank had excess liquidity.

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B. Nimalathasan, A comparative study of financial performance of banking sector in Bangladesh – An application of CAMELS rating / Annals of University of Bucharest, Economic and
Administrative Series, Nr. 2 (2008) 141-152

Table 6
Liquidity ratio by type of Banks
(Percent)

Return on Assets(ROA) Return on Equity (ROE)

Bank types
1999

2000

2001

2002

2003

2004

2005

2006

1999

2000

2001

2002

2003

2004

2005

2006
NCBs 25.2 26.5 25.7 27.3 24.4 22.8 20.0 20.0 5.2 6.5 5.7 7.3 8.4 6.8 2.0 2.1
DFIs 15.7 16.2 15.3 13.7 12.0 11.2 11.2 11.2 8.7 9.9 8.9 6.9 5.8 4.7 6.2 3.8
PCBs 25.9 24.8 24.2 26.3 24.4 23.1 21.0 21.0 8.0 6.8 6.2 8.5 9.8 8.8 5.1 5.6
FCBs 51.3 34.7 34.1 41.6 37.8 37.8 41.5 41.5 31.4 14.8 14.3 21.8 21.9 21.9 23.6 16.4
Total 27.0 26.1 25.3 27.2 24.7 23.4 21.7 21.7 8.3 7.5 6.7 8.7 9.9 8.7 5.3 5.1
 B. Nimalathasan, A comparative study of financial performance of banking sector in Bangladesh – An application of
CAMELS rating / Annals of University of Bucharest, Economic and Administrative Series, Nr. 2 (2008) 141-152

Table 6 indicates that FCBs are having the highest liquidity ratios
followed by the PCBs. This situation of constant surplus of liquidity warrants
creation of effective demand for credit at lower costs. And also another rating is
“sensitivity to market risk” which assess the degree to which a bank might be
exposed to adverse financial market conditions. In particular, BB started placing
much emphasis on banks sensitivity to interest rate movement through the
introduction of revised CAMELS rating system since 1 July 2006.

Conclusion

In the preceding analysis, it has been that the performance measurement

of a bank under traditional measures as CAMELS rating techniques. Hence the
concept of CAMELS rating for performance evaluation of a bank. CAMELS
rating system basically quantitative technique, is widely used for measuring
performance of banks in Bangladesh. Accordingly CAMELS rating system
shows that 3 banks was 01 or Strong, 31 banks were rated 02 or satisfactory,
rating of 7 banks was 03 or Fair, 5 banks were rated 04 or Marginal and 2 banks
got 05 or unsatisfactorily rating. 1 NCB had unsatisfactorily rating and other 3
NCBs had marginal rating.

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